No excuse for this dangerous delay

The competition guru Sir John Vickers has delivered a blueprint for radical change in the way our banks operate.

Under his plans, the taxpayer would be much less likely to have to fork out for future banking bailouts.

The big financial groups of the City would be required to respond better to consumer and small business demands, and more competition between banks would exist in the High Street.

All of these are laudable goals. But the sad truth is the banks have been given so long to implement these changes - which do not have to be completed until 2019 - that the report's goals are almost meaningless.

Given the current, turbulent state of the global economy and international finance it is impossible to predict what will happen tomorrow, let alone nine years on from now.

The euro crisis could yet rip the heart out of the Continent’s banking system, with appalling repercussions for our own banking sector.

Share this article

And by 2019, highly ambitious finance houses in emerging markets from the Arabian Gulf to Asia could have taken over Britain’s banks.

As has already happened with our manufacturing, much of our financial services industry could have moved overseas by the time we finally implement the Vickers report.

Radical: Competition guru Sir John Vickers has delivered a blueprint for change in the way our banks operate

In any case, who is to guarantee that a future government will not ignore the report completely and fail to implement its far-reaching proposals?

The great mystery is why the reform of the banking system as proposed by Vickers should take so long.

Anyone who reads the former Chancellor Alistair Darling’s new memoir will see that if there is the political will, massive changes to banking structures can be achieved in the blink of an eye.

He was architect of the banking rescue three years ago when Royal Bank of Scotland, owner of NatWest, and Lloyds Banking Group were largely taken into public ownership. Those massive bail-outs and the necessary restructuring of the banks, which cost some £1,000billion, were achieved over a frantic 72 hours.

The reality is that ever since the Vickers commission on the future of banking was established at the demand of the LibDems immediately after the election, the banks have engaged in a furious lobbying campaign which has seen their senior executives marching in and out of No 10 and No 11 as if they owned Downing Street.

The commission and the Government allowed themselves to be seduced by the idea that to act too fast would badly damage economic growth, risk pushing up the costs of banking to business and personal customers, and send the more mobile of the banks scurrying overseas to more favoured locations.

The result was that the timetable for reform was slowed to a snail’s pace. One only has to look at the reaction of share prices to the Vickers report to understand how triumphant the big beasts in Britain’s banking jungle – the casino bankers who run RBS, Barclays, HSBC and Lloyds – have been.

While the prices of bank shares were plunging across euroland, those of the UK banks were relatively stable.

The tragedy in all this is that – whether eventually implemented or not – Sir John Vickers’ recommendations are more far-reaching than anyone expected.

His key recommendation is that the investment or ‘casino’ banking arms which engage in complex transactions, from foreign exchange dealings to bids and deals and hedging operations where bankers gamble on future market movements, be separated from ordinary retail or High Street banking.

Another recommendation, designed to protect depositors, investors and the taxpayer from another meltdown, is that the banks should hold more capital and cash.

Crucially, the report also recommends that the casino and retail arms of the banks have their own independent boards of directors. This offers an important glimmer of light for consumers and small businesses.

It means there could finally be directors of banks on the High Street who are intensely focused on their customers’ needs – which might include loans for small businesses or acts of entrepreneurship – and who have no interest in taking massive gambles in areas such as sub-prime loans and commercial property in order to boost their bonuses.

Ironically, £7billion is exactly how
much the casino bankers of the big five High Street banks paid
themselves in bonuses last year - so if they gave up those bonuses, the
reforms could be made without any increase in costs to mortgage and
current account holders!

The cost of separating investment and retail banking is estimated in the report at £4billion to £7billion a year.

Ironically, £7billion is exactly how much the casino bankers of the big five High Street banks paid themselves in bonuses last year - so if they gave up those bonuses, the reforms could be made without any increase in costs to mortgage and current account holders!

As we know, that is unlikely to happen. The whole ethos and history of the current crop of bank chiefs, people such as Barclays chief executive Bob Diamond and Stephen Hester of RBS, is to run the bank in the interests of investment banking staff, rather than hard-pressed retail and small business customers and shareholders. These banking titans live in a micro climate of excess rewards high up in their glass towers where the real world of rising unemployment (800,000 jobs have been lost since the recession), falling real incomes and cuts in retirement benefits is an alien concept.

Indeed, despite a catastrophic decline in Barclays share price in recent months Diamond picked up a share based bonus of £6.5million last year in addition to £250,000 basic salary, and he has the potential to pick up a further £6.75million in performance related share options.

The Vickers report could encourage the banks over the next decade to fully split off their retail banks from their investment arms.

They could then focus on the customer with the intensity found, for instance, among our big retailers such as Tesco. After all, if Tesco or Waitrose treated shoppers with the contempt of the big banks they would have been put out of business years ago.

But given the long lead times allowed for reform, there are absolutely no guarantees that the radical change demanded by Vickers and his cohorts will ever be delivered.

Share or comment on this article:

Sir John Vickers banking report: There's no excuse for this dangerous delay